If 2025 was defined by mega-cap momentum, the first quarter of 2026 has been marked by reversal, rotation, and recalibration. Performance has broadened across size, style, and sector, with U.S. large caps lagging smaller companies year to date, value outperforming growth, and last year’s lagging sectors including energy, materials, and consumer staples moving to the front. In our view, this reflects a market that is becoming more price sensitive, more selective, and more differentiated beneath the surface.
That shift is unfolding against a more uncertain backdrop. Last year, investors contended with a wide range of risks, including tariffs, war, government shutdown concerns, and rising questions around the long-term implications of artificial intelligence. In many ways, the first quarter of this year has compressed a similar level of uncertainty into a shorter period. For instance, geopolitical conflict has contributed to higher gasoline prices, AI-related concerns have broadened beyond technology into areas such as software, financials, and private credit, markets are considering future Fed leadership changes, and tariff uncertainty has reemerged following the Supreme Court’s ruling.
The broad equity market has moved lower this year, but the decline has remained more restrained than one might expect given the volume of headline risk investors have had to absorb. Year to date, as of March 31st, the market’s maximum drawdown has been approximately 9.8%, still well below the 46-year average intra-year drawdown of 14.2%, underscoring that this year’s volatility has been meaningful but not unusual by historical standards.1
Dispersion across sectors and individual stocks has been significant, creating a market environment that has felt far more volatile than the major averages alone would suggest. In our view, that disconnect between index-level performance and underlying rotation has been one of the defining features of the quarter.
The rotation taking place beneath the surface may also be an early sign that the long-awaited broadening in performance is beginning to surface. The S&P 500 Equal Weight Index has returned 0.61% year to date, compared with -4.48% for the market-capitalization-weighted S&P 500 Index, suggesting that performance is beginning to expand beyond the narrow areas that dominated recent years.2
Broad exposure to powerful secular themes such as AI was often sufficient in the recent years, but today’s environment appears to require greater selectivity and adaptability as multiple factors reshape the opportunity set. Recent AI-related volatility may reflect a recalibration in market focus rather than a deterioration in underlying company fundamentals.
Geopolitical risk has been another defining theme for the quarter. Financial markets often follow a familiar pattern when conflict escalates: initial headlines trigger volatility as investors weigh uncertainty and worst-case scenarios, risk assets come under pressure, oil prices move higher, and safe havens attract demand. More often than not, those reactions fade as investors are reminded that many geopolitical events remain geographically contained and only indirectly affect U.S. growth and corporate earnings.
The most meaningful exception to that pattern is when geopolitical conflict disrupts energy markets. Energy shocks are especially challenging because they can be both inflationary and growth-constraining. Higher energy costs pressure household budgets by crowding out discretionary spending, while also feeding into inflation directly through energy prices and indirectly through transportation and manufacturing costs. That combination can place central banks in a difficult position, as slower growth and firmer inflation pull policy in opposite directions.
Stateside, the U.S. economy is more insulated than in prior decades, though not immune. The U.S. is now a net energy exporter, and the economy is far less oil-intensive than it was in the 1970s. That does not eliminate the impact of rising global oil prices but it does reduce the magnitude of the shock relative to past cycles. Perhaps suggesting that sustained conflict may be more likely to reinforce inflationary pressure than produce the kind of deep recessionary drag associated with earlier energy crises. For investors, it is important to remember that geopolitical risk premia can enter markets quickly and fade just as fast.
At the same time, the broader role of geopolitics in markets is evolving. For much of the post-World War II period, investors operated in a relatively stable environment that was broadly supportive of global trade, cross-border capital flows, and economic integration. Today, that backdrop is becoming more fragmented. Geopolitics is no longer simply a source of sporadic volatility. It is increasingly shaping trade policy, industrial policy, energy policy, and access to technology, with implications that flow through to inflation, fiscal policy, monetary policy, and capital allocation. From a portfolio perspective, that matters because geopolitics is becoming a more structural driver of returns, correlations, and risk pricing. It is influencing where growth occurs, which sectors receive policy support, and how investors assess both opportunity and risk.
While geopolitical developments have clearly influenced sentiment this quarter, the more durable story for investors remains how markets are processing those events through the lens of fundamentals, policy expectations, and relative performance beneath the surface. Part of the market’s resilience likely reflected an assumption that the administration would respond quickly if economic or market strain became too severe. It remains possible that policymakers ultimately respond to the pressure that higher oil prices and geopolitical conflict place on consumers and financial markets, particularly in a midterm election year. That said, such an outcome is far from guaranteed, as geopolitical conflicts rarely offer the same degree of policy flexibility or clarity as more traditional economic shocks.
Beneath the surface, performance across the market has been far from uniform. Energy has been a standout performer, but the story has not been limited to one sector alone. Strength has also emerged in areas such as materials, industrials, staples, utilities, and real estate, while financials, consumer discretionary, and technology have lagged. Importantly, the divergence is not only happening across sectors, but within them as well.
That same pattern is evident at the individual stock level. This is not a market in which stocks are moving lower in lockstep. Many companies continue to outperform the broad indexes despite a more volatile headline environment, reinforcing that this is a market increasingly driven by differences in business quality, valuation, earnings resilience, and exposure to shifting macro forces.
Another notable development has been the growing dispersion within the Magnificent 7. After moving largely in sync through 2023 and 2024, that group has become meaningfully less correlated since mid-2025. The implication is clear: the Magnificent 7 are no longer one uniform trade and increasingly need to be evaluated on individual fundamentals rather than treated as a single source of market strength.
Taken together, this volatility and dispersion beneath the surface create opportunities within the equity market that may not be obvious at the index level. Periods like this often feel uncomfortable in real time, but they can also create a broader opportunity set for disciplined investors focused on quality, valuation, and long-term fundamentals.
The interest-rate backdrop has also shifted meaningfully. The Federal Reserve has maintained a cautious stance while acknowledging that geopolitical developments and the resulting uncertainty around energy prices and inflation complicate the policy outlook. Markets have responded by materially repricing expectations for rate cuts, a reminder of how quickly geopolitical risk can flow through to inflation expectations and monetary policy assumptions.
Periods like this are a useful reminder that market risk is not always expressed through broad index declines alone. More often, it appears through narrowing participation, sharper rotations, and greater divergence across sectors, styles, and asset classes. Even so, we do not believe long-term investment plans should be reshaped in response to geopolitical headlines alone. The history of markets is one in which innovation, earnings growth, and the long-run incentives of capitalism have tended to outweigh short- and medium-term disruptions.
Our role is not to forecast every geopolitical outcome, but to help clients understand why the environment may be shifting and why resilience, diversification, and disciplined long-term positioning remain so important. For long-term investors, the first quarter has reinforced a familiar principle: staying grounded in a thoughtful plan matters more than reacting to every headline.
1 JPMorgan Guide to the Markets, March 31, 2026
2 Morningstar.com
Unless otherwise indicated, commentary on this site reflects the personal opinions, viewpoints and analyses of the author and should not be regarded as a description of services provided by GatePass Capital or its affiliates. The opinions expressed here are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any security or advisory service. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. While all information presented, including from independent sources, is believed to be accurate, we make no representation or warranty as to accuracy or completeness. We reserve the right to change any part of these materials without notice and assume no obligation to provide updates. Nothing on this site constitutes investment advice, performance data or a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Investing involves the risk of loss of some or all of an investment. Past performance is no guarantee of future results.
The best time to start is now. Personalized financial solutions don’t have to be difficult. We’d love to chat with you to learn more about who you are, what your goals are, and how we can help.
TALK TO AN ADVISOR